2023 results are in line with our and market expectations

The company announced its 2023 results: revenue of HK$8.666 billion, up 13.0% year on year; net profit to mother of HK$580 million, up 37.6% year on year. Net profit is in line with our and market expectations.

1) Hong Kong and Macau curtain wall projects support the company's core profits. In 2023, the company's façade business was +13% to HK$8.67 billion, of which the Hong Kong and Macau curtain wall business revenue was +27.4% year-on-year to HK$4.58 billion. The gross profit margin in 2023 was 11.2%, up 0.5ppt year on year. Among them, the curtain wall business increased 1.2ppt to 13.2% year on year; gross margin for general contracting engineering and operation management decreased 0.4/3.2ppt to 0.1% and 9.5% respectively; sales and management expenses decreased 0.5ppt to 3.3% year on year; and net margin increased 1.2ppt to 6.7% year on year. 2) The contract amount for the curtain wall project remains high. The amount of new contracts signed for curtain wall projects in 2023 was -1.2% to HK$8.49 billion, and the amount of contracts in progress was +8.4% to HK$22.06 billion. The slowdown in growth was mainly due to the fact that major projects in Macau had an elevated base in '22; the uncompleted curtain wall business increased +12.8% of the year-on-year contract amount to HK$12.41 billion. The total amount of new contracts signed and the amount of contracts in hand were +13.6%/+14.4%, respectively, to HK$115/29.9 billion, which remained high. 3) Hong Kong and Macau have stable cash flow and steady and enterprising operations. Since the company's Hong Kong and Macau curtain wall business segment is highly competitive and has steady returns, this sector accounts for 53% of revenue, providing strong support for cash flow and profit margins. The company's net operating cash flow remained steady in 2023, with interest-bearing liabilities of HK$140 million to HK$1.19 billion year over year, and balance ratio of -2.2ppt to 78.4% year over year.

Development trends

The Hong Kong and Macau markets continue to improve, and the mainland is actively forging ahead. We believe that the company has a high market share in Hong Kong and Macau, and will continue to benefit from large-scale plans such as the Northern Metropolitan Area to provide strong support for the company's development in the 14th Five-Year Plan. At the same time, the company selected high-quality high-end projects in the mainland market, and recently won the bid for OPPO headquarters.

The BIPV market is broad and is expected to become a new growth pole for the company. The company plans to reach HK$25 billion in revenue and HK$3 billion in profit by 2030 (profit CAGR of 26% in 23-30 years), which will mainly help emerging businesses such as BIPV. The company mentioned that the construction process accounts for more than 20% of carbon emissions, and if we want to reach the carbon peak target in the future, BIPV may be a major solution. At the same time, the government recently introduced policies such as the “Work Plan to Accelerate Energy Conservation and Carbon Reduction in the Construction Sector” 1, which mentions formulating and improving BIPV related standards and atlases to promote BIPV construction on a pilot basis. We believe this move is expected to help the commercialization process of BIPV and support the company's emerging business development.

Profit forecasting and valuation

We kept our 24-year profit forecast unchanged, introducing net profit of HK$1 billion for 25, and the current stock price corresponds to 2024/25e 7.2/5.6x P/E. The outperforming industry rating and target price of HK$3.65 remain unchanged, corresponding to 11.1x/8.3x 2024e/25e P/E, implying 48% upside.

risks

Demand fell short of expectations, and order delivery fell short of expectations.